Penrice in ‘two strikes’ pickle

The first test of the government’s two-strikes legislation designed to curb excessive executive pay will take place in just over two weeks. Adelaide-based sodium bicarbonate manufacturer
Penrice Soda Holdings
has the dubious distinction of being the first company to face a board spill under the controversial laws.

D-Day is January 25, when shareholders get to decide whether to re-elect chairman
David Trebeck
and his deputy, Andrew Fletcher, or install three new directors put forward by disgruntled shareholder London City Equities.

The irony is that the board spill has little to do with executive remuneration and more to do with shareholder dissatisfaction with the management of a company that has failed to adapt to a structural decline in manufacturing.

Trebeck wrote to shareholders yesterday, calling on them to support his re-election and warning against the danger of voting in the alternative candidates, who he says do not have the experience to fix Penrice’s problems.

Trebeck is right when he says the two-strikes rule is a “lightning rod to which all shareholder disaffection can be directed".

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This does not mean disgruntled shareholders do not have the right to take advantage of the legislation and try and force change.

However, it does reinforce the argument that the legislation is not being used to do the job for which it was created. Company directors have been jumping up and down about this for some time. Australian Institute of Company Directors chief
John Colvin
has described the legislation as a “new destabilising force" that can be abused by shareholders with ulterior motives.

Penrice’s challenge is that most of its shareholders are retail investors. Less than a third of its disparate register voted at the October annual meeting, which is hardly representative of the shareholder base.

As the chairman of the first company facing a spill vote, Trebeck is in uncharted waters.

He told Chanticleer yesterday his first challenge was getting more of the register to vote. The second challenge is getting them to vote for him and Fletcher.

He says some retail shareholders he has contacted were surprised that their vote mattered at all. Voter apathy is a big factor that diminishes the effectiveness of the two-strikes rule.

London City chief operating office Peter Murray, who once joked that South Australians do not like outsiders, has been trying to get representatives on the Penrice board since 2009. Legal efforts to gain access to the company’s books have also been unsuccessful.

It is a last resort, but the two-strikes rule could finally be Murray’s solution if he can maintain the kind of support he had from shareholders at the annual meeting.

Most institutional shareholders and proxy advisers recognise that a board spill is not a healthy option for any company and would likely vote against the move except in extreme circumstances.

This plays out in the fact that the board spills so far have been confined to smaller cap companies. Penrice is the first to face a spill but it is not alone. Shareholders in
Global Metals
Exploration have a spill vote three days later on January 28.
Rey Resources
and takeover target
Globe International
also face spill votes.

There is no doubt the rule is not being applied the way it was intended, although it has been effective in fostering debate around executive pay and keeping boards on their toes.

Staving off the reputational damage from a second strike has been a priority for many directors, and this has been reflected in some remuneration reports.

For a company like Penrice, change is clearly needed. It is hard to imagine the company’s performance could have been be any worse had London City Equities won board influence in 2009.

It has been the victim of a structural decline in manufacturing, the high dollar, which has smashed the value of soda ash, and declining demand for glass as Australia sends more wine overseas for bottling.

However, the company tried to ride out what it thought was a cyclical issue and will now have to give shareholders some good reasons for sticking with the current management.

In Penrice’s defence, though, there has been no change in directors’ pay for two years and the board has been downsized by two. Trebeck also says executive remuneration base pay has changed little in two years.

The January 25 vote is nothing to do with pay but will be a test of whether shareholders can use the two-strikes rule to address concerns about a company’s performance.

Launa Inman
won’t have much time to spend at the beach this summer.

Despite the distraction of a potential takeover bid and the departure of more senior staff, the determined
Billabong
chief executive is close to finalising an organisational restructure of the group.

Keen to put her stamp on a company which has lurched from crisis to crisis in recent months, Inman plans to break down Billabong’s old geographical reporting lines.

The goal is to create a more globally focused structure aimed at removing duplication, recognising the importance of e-commerce and taking into account fast-growing new markets like South America.

It is another element to Inman’s four-year turnaround strategy and efforts to fix Billabong’s laid-back culture which got the company into trouble in the first place.

Inman will have to convince themarket she is introducing meaningful change and not just shuffling deck chairs on the Titantic. Her message is clear, though: she is not sitting back and waiting for a takeover offer.

There will be plenty of resistance to the changes from within the company and the surf industry itself, which has never favoured outsiders.

Last week Quiksilver appointed former Disney and Nike executive Andy Mooney as its new chief, another sign that surfing experience is not a prerequisite for running a global surfwear group.

Inman is looking at companies like Adidas for inspiration. Adidas restructured in 2009 by abolishing its regional headquarters in Europe and Asia and adopting a more global approach.

Senior management departures are not surprising in a period of transition, though the uncertainty created by a string of unsuccessful takeover bids does not help in retaining staff. Billabong needs some new blood to fix some old problems and Inman seems confident there is plenty of untapped talent within the company to fill the gap.

A solid but unspectacular result from US aluminium giant Alcoa has established a positive tone for the start of the earnings season after a tough 2012.

Shares in Alcoa’s Australian joint venture partner,
Alumina
, had a good run yesterday after the US company returned to profit and beat some sales forecasts. It came on a day when iron ore prices hit a 15-month high, though any notion that Chinese demand will keep prices at those levels for the long term are misguided.

Alcoa was also more upbeat than previously on China, saying demand from the world’s largest aluminium user would grow 11 per cent this year.

Alumina, which has now shrugged off last year’s fears it could be forced to raise equity to settle a bribery case, continues to battle pricing uncertainty and the strong dollar.

Productivity improvements and cost cuts will continue to be a key theme for companies in 2013 and Alcoa and Alumina have used them to cushion the blow from lacklustre aluminium prices.

Because Alcoa is the first S&P 500 company to report fourth-quarter results, it sets the mood for the rest of the market and is seen as a bellwether for the health of the wider economy.

A solid quarter without disappointments or downgrades is the most many companies can hope for this year. While there is a sense that the worst is over, no one is looking for double-digit growth and the market remains highly nervous.

Alumina says the result reflected continued challenging conditions and the strength of the local dollar, though margins improved in the quarter.

While Alcoa was upbeat about its prospects for the coming year, there are still concerns the company may struggle to keep its credit ratings, with aluminium prices expected to remain flat over the next several years. Bank of America Merrill Lynch analysts note the company is highly leveraged for an investment grade credit rating.